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The importance of recording contracts in writing

August 2017 - Issue 96

Oral contracts are notoriously risky – they cause uncertainty and can be bad for business. The contractor in RCS Contractors Ltd v Conway [2017] discovered this the hard way – a disputed oral contract meant delays to the adjudication process, a 16 month wait for payment and an avoidable costs bill.

RCS is not an isolated case – establishing the terms or existence of an oral construction contract can be a lengthy process and delay the adjudication process. Under the Construction Act 1996, the right to adjudicate only arises if parties have a construction contract, whether that be in writing or oral. Thus if one party seeks to question the terms or existence of an oral construction contract, the adjudicator must first establish whether or not they have jurisdiction to proceed with the adjudication. If the adjudicator does choose to proceed then the unsuccessful party can reserve its right to raise the same jurisdictional argument in response to later enforcement proceedings. Such arguments delay the adjudication process, stall enforcement and affects cash flow.

In RCS, the parties had a payment dispute regarding RCS’ ground works carried out for Conway over three sites. A reference to adjudication was made. Conway argued that the adjudicator had no jurisdiction to act, arguing that there were three contracts rather than one, and therefore three separate payment disputes. Under the Construction Act only a single dispute can be referred to adjudication at a time. Consequently the adjudicator had to decide upon this issue before proceeding.

If a written contract had been in existence then such a dispute would have been unlikely to have arisen in the first place. As it was, the parties had orally agreed terms for work at three sites during a meeting in December 2012. The adjudicator, after reviewing each party’s evidence about the meeting, agreed with RCS – there was one oral construction contract and consequently a single dispute, meaning he had jurisdiction. The adjudication proceeded and RCS was awarded nearly £60,000 in relation to the sums due.

Conway obtained leave to defend RCS’ consequent claim for payment on the ground that the adjudicator had no jurisdiction. The Judge had to review the jurisdiction issue all over again and summed it up as follows –

“Either, as RCS maintains, there was one contract between the parties to cover all three sites, in which case the final account dispute was a single dispute, and the adjudicator had the necessary jurisdiction; or, as Mr Conway maintains, there were three separate contracts, one in respect of each site, and the dispute was actually three different disputes, being a claim for the sum allegedly due under each separate contract. If that was right, the adjudicator would not have had the necessary jurisdiction.”

Once again it was decided that the evidence pointed to there being one single contract covering the three sites, meaning the adjudicator did have jurisdiction to decide.

The Judge heard the parties’ arguments and evidence on what was agreed in December 2012 and concluded they pointed to a single contract covering three sites. The adjudicator did have jurisdiction to determine the dispute referred to him.

It is clear that the evidence of the parties is imperative in deciding the terms of an oral contract. The problem with oral contracts is the difficulties most parties have with remembering and establishing exactly what has been agreed, leaving scope for misunderstanding and disagreement. Any formal resolution to a disagreement of this nature, whether in adjudication or in court, will depend upon the credibility of the evidence. In RCS, the Judge preferred the contractor’s evidence. Had the parties confirmed the oral agreement of December 2012 in writing, or had a formal contract drawn up, such a disagreement would not have occurred.

The Judge made clear that the “unthinkingly repealed” s107 of the Construction Act, which made adjudication applicable to oral contracts, had led to increased uncertainty and was to blame for increased costs and wasted time in the case of RCS. It had resulted in adjudicators having “to grapple with entirely oral contracts”. While not alone in his views on s107, statutory adjustments to the Construction Act are unlikely to take place in the near future due to parliament’s current preoccupation with Brexit. Thus the best protection against a jurisdictional dispute is to ensure that a contract in is writing. In the event that disputes arise, this will ensure that an adjudicator can get straight to the important issues rather than wasting time having to hear lengthy and costly arguments in order to decide if they can determine the dispute.